The fiscal crisis in Greece is fascinating political theater, in part because the Balkan nation is a leading indicator for what will probably happen in many other countries. The most puzzling feature of the crisis is the assumption in other European capitals, discussed in the BBC article below, that a Greek default is the worst possible result. It certainly would not be good news, especially for investors who thought it was safe to lend money to the government, but there are several reasons why the long-term pain resulting from a bailout would be even worse.
1. Bailing out Greece will reward over-spending politicians and make future fiscal crises more likely. In a four-year period between 2005 and 2009, Greek politicians expanded the burden of government spending from an already excessive level of 43.8 percent of GDP to an even more excessive level of 51.3 percent of GDP. Subsidies are rampant, the public sector is bloated, civil service pay is way too high, and entitlements are wildly unsustainable. A fiscal crisis – with no escape options – is probably the only hope of reversing these disastrous policies. So why, then, would it make sense for Germany and other nations to provide an escape option?
2. Bailing out Greece will reward greedy and short-sighted interest groups, particularly overpaid government workers. Greece is in trouble because the the people riding in society’s wagon assumed that there would always be enough chumps to pull the wagon. In reality, Greece is turning into a real-world version of Atlas Shrugged. Government has become such a burden that the job creators and wealth generators have given up and/or moved their money out of the country. Should taxpayers in other nations reward the greed and narcissism of Greece’s interest groups by being forced to pull the wagon instead?
3. Bailing out Greece will encourage profligacy in Spain, Italy, and other nations. The hot acronym in public finance circles is PIIGS, which is shorthand for Portugal, Ireland, Italy, Greece, and Spain. Greece is getting all the attention now, but these other countries have the same problems of excessive spending, bloated and dysfunctional public sectors, and unsustainable finances. What happens in Greece will send a very clear signal to the politicians in these nations, much as a parent who lets the oldest child run rampant is sending signals the younger siblings. Does anybody doubt that a bailout of Greece will discourage the other PIIGS from undertaking needed reforms?
4. Bailing out Greece is not necessary to save the euro. This is the most puzzling feature of this Greek tragedy (sorry, I couldn’t resist). There is a pervasive assumption that a default somehow would cripple the common currency of most European Union nations. But why would a default in Greece undermine the euro? If California went under, after all, that would not cripple the US dollar. There are unpleasant things that would probably happen following a Greek default, but the stability and strength of a currency is a function of central bank behavior. And so long as the European Central Bank does not crank up the proverbial printing press to monetize Greece’s debt, the euro should be fine.
In my darker moments, I have sometimes warned audiences of what will happen when a majority of voters in a country or a state become dependent on government. In such an environment, it obviously becomes much more difficult to put together an electoral coalition that will lead to fiscal changes that shrink the burden of government and curtail the predatory state. This is what has happened to Greece, and what is soon going to happen in other European nations (and, barring reform, what will eventually happen in the United States). The irony of this situation is that even the folks riding in the wagon should favor reform. After all, a parasite needs a healthy host.
For background info, here’s an excerpt from the BBC article:
Despite heavy rain, there have been rallies across Greece throughout the day, with thousands of striking workers and pensioners gathering in the capital, Athens. Several thousand people were also reported to have protested in Greece’s second city, Thessaloniki. The rallies have been mainly peaceful, but in one incident police fired tear gas at rubbish collectors who tried to drive through a police cordon. …The unions regard the austerity programme as a declaration of war against the working and middle classes, the BBC’s Malcolm Brabant reports from the capital. He says their resolve is strengthened by their belief that this crisis has been engineered by external forces, such as international speculators and European central bankers. “It’s a war against workers and we will answer with war, with constant struggles until this policy is overturned,” said Christos Katsiotis, a union member affiliated to the Communist Party, at the Athens rally. …On Tuesday, Prime Minister George Papandreou’s socialist government announced that it intends to raise the average retirement age from 61 to 63 by 2015 in a bid to save the cash-strapped pensions system. …Mr Papandreou has already faced down a three-week protest by farmers demanding higher government subsidies. …The markets remain sceptical that Greece will be able to pay its debts and many investors believe the country will have to be bailed out. The uncertainty has recently buffeted the euro and the problems have extended to Spain and Portugal, which are also struggling with their deficits. The possibility of Greece or one of the other stricken countries being unable to pay its debts – and either needing an EU bailout or having to abandon the euro – has been called the biggest threat yet to the single currency. Ahead of the talks between EU leaders in Brussels on Thursday, some business media reported that Germany is preparing to lead a possible bail-out, supported by France and other eurozone members.
[…] writing about a different kind of crisis, mostly likely a sudden panic in financial markets (like Greece back in 2009-10), which is more akin to a heart […]
[…] did many European nations, most notablyGreece, suffer fiscal crises about a dozen years […]
[…] did many European nations, most notably Greece, suffer fiscal crises about a dozen years […]
[…] did many European nations, most notably Greece, suffer fiscal crises about a dozen years […]
[…] did many European nations, most notably Greece, suffer fiscal crises about a dozen years […]
[…] did many European nations, most notably Greece, suffer fiscal crises about a dozen years […]
[…] did many European nations, most notably Greece, suffer fiscal crises about a dozen years […]
[…] The investors who buy Argentinian government bonds should learn that lending to dodgy governments is a risky practice. […]
[…] disagree. Default is a better choice because it will discipline the Italian government (it would mean an overnight balanced budget […]
[…] And the Greek experience also has confirmed that bailouts exacerbate a fiscal crisis by enabling more bad policy, while also rewarding spendthrift politicians and reckless lenders (as I predicted when Greece’s finances first began to unravel). […]
[…] And the Greek experience also has confirmed that bailouts exacerbate a fiscal crisis by enabling more bad policy, while also rewarding spendthrift politicians and reckless lenders (as I predicted when Greece’s finances first began to unravel). […]
[…] my humble opinion, the only possible solution is to reject any and all bailouts and force Greece to balance its budget overnight. With luck, that may be such a sobering experience […]
[…] wouldn’t be surprised if Greece has a full or partial default. And that actually might not be a bad result if it meant an end to bailouts and Greece was immediately forced to balance its […]
[…] wouldn’t be surprised if Greece has a full or partial default. And that actually might not be a bad result if it meant an end to bailouts and Greece was immediately forced to balance its […]
[…] wouldn’t be surprised if Greece has a full or partial default. And that actually might not be a bad result if it meant an end to bailouts and Greece was immediately forced to balance its […]
[…] prediction about the vote in Greece was correct. Though I wish I had been wrong because the best long-run outcome (both for the Greek people and the world’s taxpayers) is an end to […]
[…] I also won’t be holding my breath waiting for a good outcome in Greece. As I wrote five-plus years ago, Greece needs the tough-love approach of no bailouts, which would mean a default but also an […]
[…] I also won’t be holding my breath waiting for a good outcome in Greece. As I wrote five-plus years ago, Greece needs the tough-love approach of no bailouts, which would mean a default but also an […]
[…] in early 2010, about the time the Greek fiscal crisis was becoming a big issue, I warned that a bailout would actually make things worse. I suggested it would be better to let Greece […]
[…] detest writing about Greece. I suggested back in 2010 that the best outcome was default, which would have been the most likely outcome of a no-bailouts […]
[…] it would have been better if Greece defaulted five years ago, back when its debt was much smaller than it is […]
[…] wrote back in February of 2010 that a Greek bailout would be a mistake and every development since that time has confirmed that initial […]
[…] currency and the fiscal crisis, and he makes a very good analogy (and I think it’s good because I’ve made the same point) to a potential state-level bankruptcy in […]
[…] currency and the fiscal crisis, and he makes a very good analogy (and I think it’s good because I’ve made the same point) to a potential state-level bankruptcy in […]
[…] is why I stand by my original arguments that bailouts won’t work and that a tough-love policy of benign neglect is the only feasible […]
[…] currency and the fiscal crisis, and he makes a very good analogy (and I think it’s good because I’ve made the same point) to a potential state-level bankruptcy in America. The public-debt problem becomes a euro problem […]
[…] and the fiscal crisis, and he makes a very good analogy (and I think it’s good because I’ve made the same point) to a potential state-level bankruptcy in America. The public-debt problem becomes a euro problem […]
[…] is what I said was the right approach way back when the crisis began. So maybe after every other option is exhausted, the right thing will finally happen. Hope springs […]
[…] is what I said was the right approach way back when the crisis began. So maybe after every other option is exhausted, the right thing will finally happen. Hope springs […]
[…] is why I stand by my original arguments that bailouts won’t work and that a tough-love policy of benign neglect is the only feasible solution. Rate this: Share […]
[…] un article paru alors sur son blog ici, le 10 février 2010, Dan Mitchell, du Cato Institute , expliquait pourquoi il en serait ainsi. […]
[…] One point I made deserves to be emphasized. We wouldn’t be in the current mess if the political elite at the IMF and in Europe and the United States had followed my sage advice and rejected the original bailout for Greece. […]
[…] two years ago, I wrote that bailing out Greece was misguided because it would dig the debt hole […]
[…] forced to spend the last two years implementing real reform. That’s why I stand by everything I wrote in my first post about the Greek mess. LD_AddCustomAttr("AdOpt", "1"); LD_AddCustomAttr("Origin", "other"); […]
[…] wrote back in February of 2010 that a Greek bailout would be a mistake and every development since that time has confirmed that initial […]
[…] wrote back in February of 2010 that a Greek bailout would be a mistake and every development since that time has confirmed that initial […]
[…] wrote back in February of 2010 that a Greek bailout would be a mistake and every development since that time has confirmed that initial […]
[…] wrote back in February of 2010 that a Greek bailout would be a mistake and every development since that time has confirmed that initial […]
[…] back in February of 2010, I wrote that a Greek bailout would be a failure. Not surprisingly, the bureaucrats at the International Monetary Fund and the political elite from […]
[…] back in February of 2010, I wrote that a Greek bailout would be a failure. Not surprisingly, the bureaucrats at the International Monetary Fund and the political elite from […]
[…] is actually very good news. If there is any chance of saving Europe, it will be precisely because bailouts stop and nations are forced to finally fix the awful big-government policies that have crippled growth and bloated budgets, thus leading to fiscal crises. Doug makes this […]
[…] if I had that power, Greece never would have received a bailout in the first place, but I think you know what I […]
[…] if I had that power, Greece never would have received a bailout in the first place, but I think you know what I […]
[…] if I had that power, Greece never would have received a bailout in the first place, but I think you know what I […]
[…] written much about the topic in recent months, in part because I don’t have much to add to my original post about this issue back in February. All the arguments I made then are still true, particularly about the moral hazard of bailouts and […]
[…] written much about the topic in recent months, in part because I don’t have much to add to my original post about this issue back in February. All the arguments I made then are still true, particularly about the moral hazard of bailouts and […]
[…] written much about the topic in recent months, in part because I don’t have much to add to my original post about this issue back in February. All the arguments I made then are still true, particularly about the moral hazard of bailouts and […]
[…] issue, I have not written much about the topic, in part because I don’t have much to add to my original post about this issue back in February. All the arguments I made then are still true, particularly about the moral hazard of bailouts and […]
[…] I have not written much about the topic, in part because I don’t have much to add to my original post about this issue back in February. All the arguments I made then are still true, particularly about the moral hazard of bailouts and […]
[…] when Greece first began to collapse, I argued that bankruptcy was the best option. And I noted more recently that my colleague Jeff Miron reached the same conclusion. Everything […]
[…] when Greece first began to collapse, I argued that bankruptcy was the best option. And I noted more recently that my colleague Jeff Miron reached the same conclusion. Everything […]
[…] when Greece first began to collapse, I argued that bankruptcy was the best option. And I noted more recently that my colleague Jeff Miron reached the same conclusion. Everything […]
[…] generally try to avoid being repetitious, and anything I say now would replicate what I said in my initial blog post in February. Simply stated, if you subsidize bad behavior, you get more bad behavrior. But now that a bailout […]
[…] is now at this stage. I’ve already argued here that perhaps bankruptcy is the best option for Greece, and I showed the data proving that Greece has […]
[…] is now at this stage. I’ve already argued here that perhaps bankruptcy is the best option for Greece, and I showed the data proving that Greece has […]
[…] would be, there would be even more painful long-term consequences for bailing Greece out. He gives four good […]